University of Groningen Faculty of Economics and Business

University of Groningen

Faculty of Economics and Business

Functional controlling

-Capturing the costs of administrative

services globally at multinational enterprises

by

Sophie Christin Lukas

Student number 2713160

MSc Business Administration

-Organizational & Management Control

Supervisor: Prof. Dr. Jeltje van der Meer-Kooistra

Co-assessor: Dr. Hilco van Elten

Abstract

This thesis investigates functional controlling as an administrative innovation that was developed as a response to the controlling requirements of global business services. Using transaction cost economics, it is argued that as the service provision of admin-istrative functions has been internationalized and dispersed with the use of shared service centers, global business services have been established. By means of a case analysis with two German multinational enterprises, complemented by an extensive literature review, the aims of this thesis were to understand the controlling require-ments of global business services, define functional controlling and investigate in how far it meets the controlling requirements of global business services. The thesis con-cludes that the controlling requirements of global business services are a high degree of cost transparency, clearly defined cost responsibilities, a high cost influenceability, a timely cost reporting, and the focus on decision-relevancy. Functional controlling is a performance measurement system and an administrative innovation which en-ables the multinational enterprise to plan, report, steer, monitor, and benchmark functional costs and to implement functional strategies. At last, a close linkage and consistency between the reporting, steering models and system solutions is decisive for the challenges put forward by global business services.

Acknowledgements

I would like to express my sincere gratitude to all who supported and

encouraged me in the process of writing my master thesis, to Prof. Dr.

Jeltje van der Meer-Kooistra for supervising my thesis and to the two

case firms for the knowledge and time shared. Furthermore I would also

Table of Contents

1. Introduction 1

2. Literature Review 3

2.1. The Multinational Enterprise . . . 3

2.1.1. The Phenomenon of the Multinational Enterprise . . . 4

2.1.2. Structure, Strategy and Innovation . . . 5

2.2. Management Accounting and Control . . . 6

2.3. Global Business Services . . . 7

2.3.1. Management Control Implications . . . 9

List of Figures

1. Global Business Services . . . 13

2. Structure of Functional Responsibilities at MNE-1 . . . 18

3. Functional Reporting at MNE-1 . . . 21

4. Structure of Functional Responsibilities at MNE-2 . . . 22

5. Functional Secondary Cost Allocations . . . 24

6. Budgeting and Cost Allocations for the Finance Functions . . . 25

List of Tables

1_{Note: The figures are exemplary for the actual setup of both multinational enterprises; for reasons}

List of Abbreviations

BU Business Unit

BSU Bundled Services Unit

CFO Chief Financial Officer

ERP Enterprise Resource Planning

IB International Business

ICT Information and Communication Technology

IPL Internal Profit & Loss

FDI Foreign Direct Investment

GBF Global Business Function

GBS Global Business Services

GSP Global Service Provider

MNE Multinational Enterprise

OPL Official Profit & Loss

PMS Performance Measurement System

SSC Shared Service Center

SSO Shared Service Organization

1. Introduction

On first glance, the assertion that multinational enterprises should be able to effec-tively control the costs of their administrative apparatus seems to be quite natural. However, there is more to the question of how to enable the enterprise to do so as the administrative costs are incurred at various instances within the value chain, scattered among different regions, countries, and affiliates. The support functions providing these services - and to which the administrative costs are allocatable - still remain inscrutable cost blocks for the multinational enterprise. This is aggravated by the ongoing internationalization of administrative services via offshoring initiatives to shared service centers. With the ambition to change this, German multination-als implemented functional controlling as an administrative innovation that aims at achieving cost transparency and controllability of administrative functions.

Interestingly, functional controlling still is - to my best knowledge - a significantly under-researched topic that has been covered in consulting research at best. Thus, as multinational enterprises have undergone fundamental changes with regards to the controlling of their administrative apparatus, management accounting research missed out on these developments. This thesis employs a case study approach at two German multinationals that each have long experience with functional controlling. The research questions addressed are:

• RQ 1: What are the controlling requirements of global business services? • RQ 2: What is functional controlling and how does it work?

• RQ 3: To what extent does functional controlling provide a sufficient answer to the challenges of steering global business services at multinational enterprises?

As competition grows fierce and market circumstances change, it is vital to com-pare oneself to another - this is supposedly now more important than ever for the costs incurred by support functions as large cost saving potentials are imaginable therein. Additionally, as global business services emerge, the steering of such becomes a challenge due to new controlling requirements that emerge with respect thereof. In-vestigating functional controlling as an administrative innovation that emerged within contemporary multinationals through practical necessity thus is of high relevance for the management accounting research community.

2. Literature Review

The literature review is structured as follows: First, the definition of the Multina-tional Enterprise (MNE) and its structural arrangements are examined. I will further elaborate on the concept of management accounting and control. This is followed by a review of the literature on the outsourcing of services. At last, I will outline the literature gaps and how this altogether led to the development of functional control-ling. The theoretical lens applied throughout this thesis is transaction cost economics, while drawing on International Business (IB) literature.

2.1. The Multinational Enterprise

2.1.1. The Phenomenon of the Multinational Enterprise

The phenomena of organizations expanding their operations to multiple countries was for a long time explained with international trade theories, more specifically with the capital arbitrage theory, which viewed internationalization efforts as ‘Foreign Direct Investments (FDIs)’ that moved along with movements in real interest rates of dif-ferent countries (Hennart, 2010), investing equity capital in countries with higher returns (Teece, 1986). This was argued against by Hymer (1960), who observed that FDIs were significantly financed at the higher foreign rates, which is contradictory to the statement that MNEs undertake FDIs as a reaction to higher real interest rates abroad. He further suggested that firms, as a result of foreign competition realized by lower trade barriers, expanded to foreign countries to forestall foreign competitors and to utilize the benefits associated with such a move. The internalization theory stream that followed, put forward that the market for final products has structural im-perfections and that MNEs absorb these imim-perfections by internalizing the activities that it can perform better than the market (Hymer, 1960; Dunning & Rugman, 1985).

Williamson (1975, 1981) highlights the transaction itself, arguing that each transac-tion involves transactransac-tion costs because the market has natural imperfectransac-tions stemming from bounded rationality and opportunism of agents – this theory became known as Transaction Cost Economics (TCE). Apart from that, a transaction may involve in-vesting into assets specific to the transaction, as with site-, physical asset-, procedural-or human asset-specificity. In transaction cost economics, the MNE internalizes op-erations if their transaction costs are thereby lowered and as such an MNE is just a construct bringing along the governance structures that provide for the economiza-tion of transaceconomiza-tions. The firm’s governance structure is used to ensure that the agents involved in the transaction do not behave opportunistically in terms of abusing the terms of the transaction and thereby are often superior to the market in terms of how the asset specificity and uncertainty related to a transaction are governed.

MNE.

2.1.2. Structure, Strategy and Innovation

The transaction cost approach gives little, if any, insights on how multinational en-terprises structure themselves from within, to process and economize on transactions (Hedlund, 1994). Organizational structure is about how work is distributed within the organization and the coordinating mechanisms that frame them (Meijaard, Brand, & Mosselman, 2005). Much of the research conducted on organizational structures has been using contingency theory, which assumes that an enterprises’ structure adjusts to the demands placed upon it from various contingent factors, such as the external environment and technology (Donaldson, 1999). This approach is often criticized as it fails to acknowledge the strategic choice that is seen as being inherent to orga-nizational structure. In comparison, the transaction cost approach implies that an organization will adopt those governance structures that are required to economize on the costs of the transactions carried out by the organization.

A considerable amount of research has been published on the organizational struc-ture of MNEs and broad categories have been developed to describe the different structural arrangements of MNEs - the most important of which will be outlined here. With a functional structure the organization is divided into its centralized core functions such as sales, marketing, and production. A holding structure describes an organization that is highly decentralized with business units being rather autonomous (Whittington, 2006). The multidivisional structure (M-structure) exists in organiza-tions that separate operational responsibility from strategic responsibility. While the former is decentralized in the business units themselves, the latter remains centralized. Ultimately, the business units are also held responsible for their performance. The re-sponsibility of the central unit further extends to providing the systems to effectively monitor performance and direct the business units into the direction of the overall organizational strategy (Whittington, 2006; Williamson, 1970). A matrix structure is an "overlaying of two or more elementary or single-dimension structures, it is the only type of hierarchical structure that can provide multidimensional coordination" (Egelhoff, Wolf, & Adzic, 2013, p.205).

2.2. Management Accounting and Control

The implementation of a strategy encompasses amongst others the design of appropri-ate management control systems (Langfield-Smith, 1997). Management controls are "all the devices or systems managers use to ensure that the behavior and decisions of their employees are consistent with the organization’s objectives and strategies" (Merchant & van der Stede, 2007, p.5). From a TCE perspective, organizational con-trol is about maintaining concon-trol of the costs relative to that of the market, as they were the primary reason to internalize activities (Demartini, 2014). Part of man-agement control systems are Performance Measurement Systems (PMSs), which are "set[s] of metrics used to quantify both efficiency and effectiveness of actions" (Neely, Gregory, & Platts, 1995, p.81). PMSs aim to focus managerial attention and are likely to be perceived positively if they enable managers to better accomplish their job (Jordan & Messner, 2012). Controllers - as procurers of information - should take account of the managerial use of the information generated. Hall (2010) proposed that managers often use accounting information not for specific decision making scenarios but rather to develop knowledge of their work environment. Furthermore, accounting information is in most cases part of a broader set of information and verbally com-municated between managers. The management reporting information - as output of the PMS - has the goal to document previous performance in a transparent manner, offer input for decision-making, support strategy implementation and trigger concrete activities (Gleich, Horváth, & Michel, 2008).

2.3. Global Business Services

Offshoring and outsourcing activities change an organization’s cost structures, risk exposure, as well as the everyday management (Ellram, Tate, & Billington, 2008). The focus of such offshoring activities was previously on manufacturing and it is now shifting toward business services (Kenney, Massini, & Murtha, 2009; Sharma & Loh, 2009; Massini & Miozzo, 2012). Even further, as business services have become indus-trialized, (Sharma & Loh, 2009) the offshore services increasingly include knowledge intensive services as opposed to routine services (Kenney et al., 2009; Jensen & Pe-tersen, 2012; Ward, 2004; Massini & Miozzo, 2012).

technology), which are nowadays increasingly subject of offshoring and outsourcing initiatives. This thesis focuses on administrative services, which are support activities divided into tasks such as accounting and financial statements, treasury and finance, human resource management, planning and control and internal auditing (Modina & Zanolli, 2008). MNEs which engage in offshoring may do so by locating the offshored activities outside of the parents’ home country while still remaining them inhouse -this is called captive offshoring; an alternative is offshore outsourcing, which involves an external party carrying out the activities (Kenney et al., 2009). The triggering variables in the recent wave of offshore services are amongst others trade liberaliza-tions as well as reforms and the subsequent availability of skilled labor in emerging countries (Jensen, 2009). Furthermore, developments and investments in Informa-tion and CommunicaInforma-tion Technologies (ICTs) facilitated the expansion of corporate boundaries as they reduced the transaction and adjustment costs of providing services globally (Abramovsky & Griffith, 2006). From a TCE view, organizations choose to offshore because this is the governance structure via which the lowest costs are real-ized (Ellram et al., 2008). However, IB literature suggests that additional concerns decisive for offshoring decisions are the associated learning- (Jensen, 2009) and inno-vation capabilities (Gregorio, Musteen, & Thomas, 2008). The governance mode – i.e. whether activities are kept in-house or are outsourced – depends on the contractibil-ity (volatilcontractibil-ity of supply market and extent to which contractual performance can be appointed and verified), frequency and asset specificity of the transactions involved (Ellram et al., 2008; Minnaar & Vosselman, 2013; Vosselman, 2002).

Global Business Servicess (GBSs) are provided by means of Shared Service Cen-ters (SSCs), also called Shared Service Organizations (SSOs). There is however a difference between the provision of mere shared services and global business services. Shared services often remain compartmentalized within the organizational structure and emphasize the provision of routine services; GBSs are admittedly provided by shared services but on a global basis. Even more so, a global business service strategy highlights the delivery of standardized, end-to-end processes that the entire orga-nization collectively leverages to push corporate strategy implementation. (Fersht, 2015/05/05)

affiliate at a single location to the affiliates of the MNE (Metters & Verma, 2008). As such, business services offshoring is a step towards internationalization (Lewin & Volberda, 2011) on the organization’s market-input- as opposed to its market-output-side (Schmeisser, 2013) and a precursor to organizational change (Jensen, 2009). An offshoring project can be distinguished into three stages: disintegration, relocation and reintegration (Jensen, Larsen, & Pedersen, 2013). Each of these steps implies a “potential disruption to the cohesion and consistency of the organization’s internal activity configuration” (Lampel & Bhalla, 2011, p.346). This is due to the fact that along with the creation of a SSO, decisions about the structure and hierarchy of the organization, organizational boundaries and capabilities have to be taken (Helper & Sako, 2010). Consequently, as the MNE arrives at a positive decision to source its business services from a SSC, this decision goes along with a process redesign in order to standardize and optimize the activity flow between the SSC and the geographically dispersed affiliates demanding these services (Contractor, Kumar, Kundu, & Peder-sen, 2010). As significant parts of functions and their associated process activities are relocated (Contractor et al., 2010), their respective counterparts are retained in the affiliate (‘retained organization’) (Herbert & Seal, 2012). The function, its costs and responsibilities are thus distributed accordingly with the activity split defined.

While the traditional motive behind any offshoring project primarily concerns re-ducing costs by shifting activities to low-wage countries (Kenney et al., 2009; Davis, 2005), in the long run these cost savings will not be sustainable. As a result, the global sourcing of business services needs to go along with fully exploiting the wide range of opportunities that global business services offer as well as ensuring their manageability.

2.3.1. Management Control Implications

gov-ernance model with hybrid practices and processes that fundamentally differ from more simplistic organizational forms. Herbert and Seal (2012) point out, that as functions are consolidated within the SSC, features of market- and in-house control are combined and require staff from all parties involved to seek alignment. The hy-brid governance mode increasingly supersedes the formerly common M-form of the organization (Strikwerda, 2014).

inter-organizational (i.e. outsourced) services, management control activities go beyond the legal boundaries of the organization and thus complicate the management con-trol task (Otley, 1994). Secondly, the reporting systems and channels may not readily suit the new management accounting requirements and thus a fit has to be arranged.

With regards to the focus of this thesis, Modina and Zanolli (2008) argue that ad-ministrative services must be efficacious (measured by quality of results in relation to respective targets), efficient (measured by promptness of administrative systems) and cost effective (measured by incurred costs relative to productivity of administrative systems). This three-dimensional principle can systematically be applied as a require-ment to a PMS for administrative services.

The management control implications thus – in short - emerge as hybrid governance modes are added to the MNE. Two implications worth mentioning are the distor-tion effect placed by intra-organizadistor-tional services and the insufficient fit of previous reporting channels and systems to the newly imposed steering requirements. In the case of inter-organizational services, the management control extends beyond the legal boundaries of the organization.

2.3.2. Functional Controlling

This subsection will pick up on the arguments laid out in the literature review, high-light the literature gaps, and lay out why functional controlling has been a conclusive development within MNEs.

In his literature review, Schmeisser (2013) developed a classification scheme in which articles related to offshoring were grouped into dealing with the phenomena itself, with the variables that supposedly are decisive to engage in offshoring, and the per-formance implications of such a move. With this classification it becomes apparent that in those research streams the unit of analysis is primarily the SSO. However, I argue that the phenomena of global business services must be seen from a more holis-tic perspective with the MNE as the unit of analysis. Figure 1 shows an exemplary set-up of an MNE with global business services and is indicative for the structural changes associated with them. Affiliates of business segments retain some proportion of the business functions while utilizing the services supplied by the SSC; as indicated by the colored lines, the functions are composed of both respectively. Along with these structural changes, management accounting implications must be addressed. Accordingly, “once firms have installed disaggregated configurations of their value chains, offshoring organizations must actively engage in coordinating and controlling their global networks of value chain activities” and “future research might concentrate on the ‘offshoring coordination capabilities’ ” (Schmeisser, 2013, p. 403). Taking the MNE as the unit of analysis enables me to point out the implications that global business services have on the management accounting of MNEs as new controlling requirements emerged that necessitated the development of functional controlling.

Figure 1: Global Business Services

As significant parts of the business functions’ activities are no longer performed by the affiliates but by the SSC, only a small fraction of the function is retained within the affiliates. Previously - with a shared services strategy - many enterprises argued in favor of market-based control of shared services operations (see for example Min-naar, 2014; Häusser, 2013). This control mechanism however brought along several disadvantages as it increases corporate complexity and does not generate the criti-cal mass necessary for economies of scriti-cale and scope. Now that shared services are integral parts of functional activities instead of mere service providers - as a global business services strategy dictates - MNEs have started to apply hybrid governance modes. While previously the market was used as a benchmark to evaluate relative performance, functional controlling now enables enterprises to benchmark their sup-port functions externally. Along with the notion set forth in the beginning - namely that MNEs have the dilemma of either being internally consistent or allow internal inconsistency to adapt to environmental variables (Rosenzweig & Singh, 1991) - func-tional controlling effectively is tantamount to a step towards internal consistency.

effi-ciency and cost effectiveness should be provided. Given the complexity of the MNEs’ organizational- and reporting structure, this proves to be a challenge to MNEs. Willmes and Gschmack (2014) refer to the huge cost saving potential for adminis-trative services while they are hard to realize due to the non-transparency of costs. This is because the administrative services’ costs are allocated directly to the opera-tive business areas. Furthermore, as administraopera-tive services can be defined diversely, comparing the general & administrative costs to that of competitors does not nec-essarily indicate relative efficiency. The underlying goal of the functional controlling thus is to make the administrative costs incurred by an organization’s administrative organization transparent and controllable.

3. Methodology

The first literature gap identified concerns the lack of research employing the MNE as the unit of analysis when investigating the controlling-, or alternatively management accounting-, implications of global business services. This thesis will therefore employ a more macro perspective with the MNE as the unit of analysis. To answer the re-search question, a two-case study approach was chosen following the recommendation of Eisenhardt (1989) on choosing cases which are likely to yield new insights. The cases are two German multinational enterprises that have been identified to pioneer the development and implementation of functional controlling. Although both MNEs operate in different industries, the geographical dispersion of their operations, their organizational structure and their progress in the area of functional controlling are much alike and hence match for the purpose of this research. Both MNEs will be han-dled anonymously throughout the paper and I will simply refer to them as MNE-1 and MNE-2; the thesis is written on behalf of MNE-1 and in cooperation with MNE-2.

The second literature gap identified concerns the shortfall of methods to evaluate the performance of SSOs in quantitative and qualitative terms. To fill this gap, this thesis will therefore introduce functional controlling as a form of PMS to capture the total costs of administrative services as related to a function, whereby comparisons to former functional costs can be made and thus performance effects visualized. The master thesis will thus follow a theory development approach as it aims to generate new knowledge in the field of management accounting.

for each interview held. An overview of the interviews held and the respective posi-tions of the interviewees is provided in table 1 on page 40. Furthermore, during the time spent at each MNE, supplementary information could be collected by means of conversations, of which I took notes to my best endeavors. Using the data gathered, within-case analyses were created, which involved analyzing each of the two cases separately from one another to become familiar with the unique characteristics of each case before trying to build patterns across both cases (Eisenhardt, 1989). Sub-sequently the cases were systematically analyzed for cross-case patterns with regards to the research questions. An inductive reasoning was applied, meaning that the-ory is derived from the data (Ketokivi & Mantere, 2010). To ensure that emerging patterns fit the underlying data, it was consistently checked whether they matched the data. The emerging theory could then be applied deductively on the phenomenon.

4. Results

This section will introduce functional controlling as implemented within the two case firms. In respect thereof, the two cases will be introduced independently from each other by means of a within-case analysis that integrates the findings from the docu-ment analysis and the interviews held with as much detail as possible.

4.1. Multinational Enterprise 1

The shared services journey of MNE-1 already started in the beginning of this century and today the SCCs are highly mature and active in all regions, functions and busi-nesses. The shared service operations and IT-services were merged into one newly founded, separate global service provider (GSP) organization as two independent functions. As the IT typically maps the processes which are then executed within the shared service centers, synergies could be generated by positioning them closer together and realizing total process ownership. Both functions, IT and SSC represent the typical service provider functions, their costs are allocated to other functions and business units. Within the IT there is a separation between so called run-costs, i.e. the costs for IT operations, and change-costs, i.e. project costs.

Figure 2: Structure of Functional Responsibilities at MNE-1

Due to the responsibility principle the receiving functions are responsible for all costs incurred by their functions and receive a target which includes primary and secondary costs similarly. This is amplified by the total functional cost targets being a compo-nent of the incentive system. The incentive system comprises of three compocompo-nents: the global target (measures based on the group as a whole), the team goals (includes 30% business unit performance, 30% cost target and 40% qualitative targets), and the individual targets (individual performance, also in relation to peers). Therefore the costs of service functions, such as SSC and IT, must be cascaded, i.e. allocated, to the other functions as secondary costs already within the planning phase, causing a sequential planning of functions. The planning is assisted by a global planning system, which is however not integrated with the ERP reporting systems. Addition-ally, the planning and reporting systems are not aligned in terms of granularities and structures, which requires MNE-1 to procure and adjust the reporting data quarterly to compare the actuals with the plan.

made. Thereby, the business unit and the function agree on an annual charge which is invoiced at a monthly rate. The alternative to fixed cost agreements are cost-driver based allocations following an activity-based method that is reviewed and fixed once a year. MNE-1 has defined standard processes within the finance function, for which it enables a holistic reporting of the process-related costs by charging all process-related costs to the local cost center and then following the same driver-based allocation procedure. With both methods, deviations remaining on the cost centers are accu-mulated and reported as the deviation function in the IPL but then allocated to the corporate segment to avoid lengthy adjustment procedures. Functions that have no direct supply-relationship, such as the tax function, are allocated on a net external sales-basis. Thus functional costs are always fully absorbed costs. The second report-ing level is the region, which the functional regional management costs followreport-ing the principles of leadership (vs. simply services) and regional responsibility to be reported as such; related functional secondary costs are also reported in this level. The third reporting level is the global level, which includes the functional and corporate over-heads. The former includes costs of functional activities which provide global support to the businesses. The latter includes costs incurred in the stewardship and control of the whole group and again the principle of leadership and global responsibility applies. Figure 3 summarizes the functional reporting approach as used by MNE-1. MNE-1 consolidates their functional costs on different perspectives: cost type-, cost allocation- (business units), and process-reporting, all amounting to the same net budget. Thereby cost transparency is realized and the affiliates obtain concrete in-dications where administrative costs are incurred, where they de- and increased, and thus where improvements are required - amounting to actionable steering impulses.

Every affiliate maintains a local Enterprise Resource Planning (ERP) system which is not yet integrated into the systems used by the headquarter, resulting in a manual interface. Additionally, the systems do not have harmonized master data standards which complicates the analysis of reporting data.

4.2. Multinational Enterprise 2

Figure 3: Functional Reporting at MNE-1

cost responsibilities, with costs not being steered globally but where they occur. As will be discussed later, the finance functions (finance, accounting, taxes, audit) are an exception.

Figure 4: Structure of Functional Responsibilities at MNE-2

the other hand, if the annual primary costs are higher than a certain amount separate cost centers have to be created. The cost center should be assigned to the major user.

The allocation logic within MNE-2 follows the value flow principle and has been determined by means of the principles laid out previously. The basic allocation struc-tures will be illustrated with special attention to the cost allocations of the BSU and the finance functions.

Primary costs are always charged at actuals, by nature the secondary costs remain to be allocated. For secondary cost allocations, three differentiations are defined in the value flow catalogue, as figure 5 outlines. The first is the global function (such as the finance functions explained below), for which the costs are only reported for the business units centrally. The second is a global charge, for which the costs are reported within the P&L of the legal entity. The third is that of the global service, for which the demand and P&L allocations are defined locally. The secondary cost allocations are twofold: on the one hand there are project-related secondary costs, for which the project owner should be fully responsible – and thus fully charged for; project-related secondary costs are thus allocated at actual amounts to the cost ob-jects. On the other hand, there are standard operational secondary costs for which the influenceability is usually short-term. The value flow allows two different ways of allocating those costs. In the first case, the BSU charges the respective local busi-ness units the budget figures, the deviations are aggregated directly transferred into the local business unit’s P&L to enable profitability management (e.g. IT workplace costs). In the second case the costs are directly transferred into the local business unit’s P&L. A positive result of this decision is that discussions do not take place on the basis of cost centers, but bundled in the P&L as a part of profitability man-agement. Very few (exceptional) costs incurred in the BSU are directly charged to the Group Recon function and remain there without being allocated, for example the costs of the country’s senior representative.

nei-Figure 5: Functional Secondary Cost Allocations

unit. Each month the costs of the finance functions are then allocated globally to the business units based on these percentages. This allocation is intentionally subject to flaws, as on the one hand less costs could be incurred for dedicated resources as planned, in which case the business unit would still pay the percentage determined – this is as much as to say that the business unit should be required to plan as pre-cisely as possible. On the other hand it might also occur that there are unforeseeable planning deviations such as acquisitions, this is currently considered case-by-case.

Figure 6: Budgeting and Cost Allocations for the Finance Functions

With the principles laid out in the value flow catalogue concerning the primary and secondary cost charges, as well as the functional tagging of costs in mind, the follow-ing passage will outline how MNE-2 set up a reportfollow-ing tool for functional costs.

the preceding. The initial assumption is that the sending organization is the same as the receiving organization. The second step defines costs which are most likely from certain organizations, the third defines archetypes – costs which can only be from a certain organization. As MNE-2 bundled all service functions in a separately reported unit, certain primary costs can only exist in such a BSU, this is an archetype. At last, there is the possibility to create reporting-system based receiving objects for each sending organization. This rules-based tool has the disadvantage that the rules may become invalid with structural changes. The cost reporting tool for functional costs thus yields the advantages of automated functional reporting of actual costs as well as more time and possibilities to analyze functional costs.

The planning approach at MNE-2 follows the distributed responsibilities, local services are planned locally, global services (services from GSP based on local demand) and global charges are planned globally. Globally, the functional budgets are consolidated; there is however neither a global, integrated planning system nor a standardized plan-ning schedule.

As part of the distributed responsibilities model, country council has the sole re-sponsibility of the functional budgets for the administrative services provided by the BSU. Prior to approving the local functional budgets, a guidance letter (issued cen-trally) will be received in which the functional strategy’s priorities are laid out to be considered within planning. However, the guidance letters currently do no set quantitative functional targets except for the IT function. Here, prior to the country council’s determination of their IT budget, targets are set which are however free of any specific activities. A baseline is taken and centrally provided assumptions are applied, such as merit increases, inflation rates and exchange rates and GSP price adjustments and eventually a country-specific growth component. After approving the functional budgets, theoretically no adjustments are possible. This yields some difficulties as the countries’ functional budgets may add up to a higher amount than intended by the BUs, which in theory is unchangeable in first place, and the question would arise where to adjust in second place. Additionally, the BUs have no direct control of the BSU providing the local administrative services.

likely to be required by the BSUs in the country units. In case the internal customer agrees with the proposed amounts, it is taken as a planning assumption for the calcu-lation of the service costs, which will finally be handed over to the country units. As will be indicated below, each organization is only directly responsible for their own primary costs, their own service demand, as well as their project-related secondary costs – therefore the country units do not interfere into the calculated service costs of the GSP. The global functions, namely the finance functions, are under the sole responsibility of the respective functional heads and are planned by means of the three-step model laid out in figure 5.

5. Discussion

Having represented the functional controlling at the two case firms, this section will subsequently summarize the arguments laid out as a part of this thesis. Thereafter, the results will be interpreted by means of answering the research questions. At last the theoretical and practical implications of this thesis’ findings will be set forth.

My first research question asked for the controlling requirements of global business services. Referring back to the case analysis, multiple management control issues emerged once the multinational enterprise as a whole is taken as the unit of analysis instead of the shared services organization. An administrative innovation generally causes a reassignment of responsibilities (Teece, 1980). In terms of the matrix-like set up of functional activities, the question arises who remains responsible for such costs. MNE-1 has established global leadership and thus global cost responsibilities for primary and secondary functional costs; the affiliates remain no longer responsible for these costs even though ultimately the cost burden is on their side. In contrast, within MNE-2 the affiliates remain responsible for their primary costs and their de-mand for dede-mand-driven secondary costs. Along with cost responsibilities, there must follow a cost influenceability i.e. the responsible stakeholders must be able to influ-ence the costs associated with their responsibilities. At MNE-1 the functional heads are tasked, together with their regional managers, to steer their functional costs along with the targets set while MNE-2 applied a primary steering approach, each stake-holder is tasked to influence the costs associated with their cost responsibilities. To enable all stakeholders to do so, at MNE-2 the functional costs can be analyzed with the functional cost reporting tool any time, at MNE-1 the functional costs can be an-alyzed quarterly. To be able to report functional costs – which are initially reported on cost centers within the affiliates – a high degree of cost transparency is required to be able to enable the aggregation and the traceability of functional costs. MNE-2 accomplished this by standardizing all of their value flows and functionally tagging their cost centers while MNE-1 uses mainly cost-drivers and fixed costs agreements to allocate and report functional costs integrated into their IPL. At last, to decrease the complexity and to increase the usability with regards to steering functional costs the focus should be on the decision-relevancy.

strate-gies holistically within the multinational enterprise. Consequently, it is a performance measurement system for functional costs as it documents previous performance in a transparent manner, offers input for decision-making, supports strategy implemen-tation and triggers concrete activities (Gleich et al., 2008). Noteworthy is also the organizational change which the multinational enterprise is exposed to as the func-tional activities of the administrative apparatus spread to and affects virtually all areas within the enterprise – a change not only in terms of structures but also in terms of perception.

The third – and last – research question asked whether functional controlling pro-vides the effective means by which global business services can be steered. With regard thereof, even though both case firms have designed their functional control-ling in substantially different ways, the cases nevertheless showed that functional controlling is indeed required in terms of offering the performance-related inputs to maximizing the joint value of the value chain in the first place, and to effectively realize the controlling requirements of global business services. Functional controlling will be most effective whenever there is a close linkage and consistency between the reporting, steering models and system solutions.

6. Conclusion

This thesis has started by laying out the arguments which led to the development of functional controlling by means of a comprehensive literature review. In this context administrative services have been internationalized and thus dispersed by transferring them into shared service centers. Thereby the service provision and consequently the cost structures have been scattered. With the provision of global business services, the focus was on offering standardized services together with a shift from routine to knowledgeable services which were provided fully integrated with the remaining re-tained activities. The dispersed functional activities have been brought together and – with controlling being the disciple providing the means by which the organization can be steered – the functional controlling was implemented.

ex-planations of how functional controlling works. Essentially, the designs rest upon different organizational setups, different reporting practices and different controlling concepts. However, the cases brought about valuable insights of functional controlling in general. Consequently, answering the question of how functional controlling could be defined, functional controlling can indeed be classified as an administrative inno-vation which enables the multinational enterprise to plan, report, steer, monitor and benchmark functional costs and to implement functional strategies holistically within the multinational enterprise; it is a PMS for administrative functions. My third and last research question was whether the functional controlling is a sufficient answer to steering global business services. Considering the evidence collected in this the-sis, functional controlling is essential to realize the controlling requirements of global business services. However, a close linkage and consistency between the reporting, steering models and system solutions is decisive for the challenges put forward by global business services.

The phenomenon of global business services has not yet found its way to all organiza-tions, it primarily remains a concern to organizations of a certain size with dispersed service provisions and significant costs for their administrative apparatuses. As not yet all organizations face the resultant controlling requirements, functional controlling is a very recent topic, which is new to literature. However, in the following years it can be expected that the question of how functional costs can be holistically reported and steered will become of high significance within contemporary organizations. This research thus has – in view of this question – aimed to shed some light on functional controlling as a way to capture the costs of administrative services globally at multi-national enterprises.

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Appendix

A. Appendix

Label MNE Role Length

(min.) Documentation

1-1 MNE-1 Corporate Director

Functional Controlling

77:45 Recorded and transcribed

1-2 MNE-1 Manager IT Controlling 57:46 Recorded and

transcribed

1-3 MNE-1 Manager Management

Reporting & Systems

13:07 Recorded and transcribed 2-1 MNE-2 Functional Cost Controller

- Information Technology

62:46 Recorded and transcribed 2-2 MNE-2 Functional Cost Controller

- Human Resources

40:08 Recorded and transcribed 2-3 MNE-2 Functional Cost Controller,

- Law, Communication, Purchas-ing

69:03 Recorded and transcribed

2-4 MNE-2 Functional Cost Controller

- Finance, Accounting, Taxes, Audit

52:00 Recorded and transcribed

2-5 MNE-2 Accounting Organization

Manager

45:23 Recorded and transcribed